BlackRock’s iShares Sees ETF Market Doubling

Nov. 27 (Bloomberg) -- IShares expects Canada’s exchange-traded fund market will double to about C$100 billion ($100.8
billion) in three to five years and the company plans to offer
products and partnerships with firms such as Sun Life Financial
Inc. to maintain its No. 1 rank.

IShares Canada, a unit of BlackRock Inc., the world’s
largest asset manager, is planning to unveil at least one new
product in 2013, said Mary Anne Wiley, managing director and
head of the Toronto-based company. The strategy for 2013 will be
producing “themed” ETFs as opposed to those defined by
geography, she said.

“We don’t need another Canadian equity ETF,” Wiley said
in an interview at Bloomberg’s Toronto office. “Where I see
demand is in strategy-based, theme-based products, income and
yields. That could be done by combining equity and fixed income
rather than going after a particular segment.”

The ETF industry in Canada had total assets under
management of about C$54 billion as of October, according to
iShares. The industry has grown 20 percent to 30 percent a year
over the past five years, Wiley said. The Toronto Stock Exchange
says it offered the world’s first ETF in 1990, tied to the TSE
35 Index. ETFs trade on exchanges like a stock, offering
investors exposure to a basket of equities, bonds or other
assets.

“We could double that size in three to five years,
easily,” she said in the Nov. 21 interview. “More and more
investors are using ETFs as part of their core investing.”

ETF Industry

Assets under management grew 26 percent this year through
October, with fixed-income products accounting for about 50
percent of net new funds, Wiley said.

IShares Canada says it holds a 76 percent share of the ETF
market, or C$41.3 billion in assets under management. The
company sells 88 ETFs, accounting for about a third of the 258
total ETFs available in Canada. The Top 10 largest ETFs belong
to the iShares family.

“It’s still a small part of the pot, so we have a long way
to go,” Wiley said.

Kevin Gopaul, chief investment officer with BMO Asset
Management Inc., who runs the company’s ETF and mutual fund
businesses, said iShares’ position as leader is not guaranteed.

“When you’re at the top, there’s nowhere to go but down,”
he said. “A big firm like iShares may have difficulty competing
in the more niche areas.”

Bank of Montreal, which is the second-largest ETF provider
in Canada, has a goal of adding market share and “growing the
pie,” Gopaul said, a sentiment echoed by Wiley.

“We are committed to growing, and growing the pie,” she
said.

Sun Life Funds

A key development popularized in the U.S. that is “on the
cusp of” becoming popular in Canada is fund managers using ETFs
in their own portfolios, including in mutual funds, Wiley said.

In April 2011, Toronto-based Sun Life, Canada’s third-largest insurer by market value, partnered with BlackRock to
launch two mutual fund products -- the Sun Life BlackRock
Canadian Equity Fund and Sun Life BlackRock Canadian Balanced
Fund -- whose portfolios are built using iShares ETFs. BlackRock
serves as the subadvisor for the funds.

Sun Life fell 0.4 percent to C$26.57 in Toronto. It is the
best-performing stock on the S&P/TSX Financials index this year,
up 41 percent.

Canadian competitors including Bank of Montreal and Invesco
Ltd.’s PowerShares have also launched mutual funds built on
their own ETFs in recent years.

“This is a unique strategy for our firm,” said Sadiq
Adatia, chief investment officer at Sun Life Global Investments
Inc. in Toronto. “We wanted to give our clients the best of
both worlds.”

Adviser Service

One of the reasons why Sun Life and BlackRock created the
funds was to give more investors access to ETFs as many
financial advisers in Canada are only licensed to sell mutual
funds, Adatia said.

The products are also subject to higher management expense
fees, or MERs, that come with mutual funds.

Rick Headrick, president of Sun Life Global Investments,
said that while the ETFs are passive, deciding how much to buy
and in what combination is active.

“There is an advice component,” he said.

In Canada, ETFs on average charge an MER of 0.4 percent,
while mutual funds charge 1.9 percentage points higher on
average, Wiley said.

“In a low-return environment like we are in, 2 percent
makes a big difference,” she said.

Mutual funds have more assets under management, though
growth is not as rapid. As of October, mutual fund assets under
management totaled C$834.3 billion, up 7.8 percent compared with
a year ago, according to data from the Investment Funds
Institute of Canada.